Catering Through Globalization : Cross-border Expansion and Misallocation in the Global Mutual Fund Industry

Efficient financial globalization should reward high-skilled financial institutions and punish low-skilled institutions. We show that the globalization of the mutual fund industry in the beginning of the century has exhibited the opposite pattern: low-skilled companies can benefit from globalization by catering to the demand of unsophisticated investors for foreign investment. This catering strategy attracts capital for fund companies but fails to deliver performance or diversification benefits to investors. Moreover, its associated cross-border capital flows reduce price efficiency and liquidity in the target country. Our results highlight the potential existence of a short-term behavioral component of financial globalization in distorting efficiency